FINANCE

Creating any corporate partnership that will function over the long haul can be a tricky proposition. Cross-sector collaborations among life sciences companies in particular involve a number of issues that, if thought through and handled well when structuring and documenting the transaction, will greatly improve the partnership's chances of success.

Most partnering relationships run into problems at some time during their life cycle. Failure to recognize and deal with such fundamental issues as the varying expectations of the parties, equity ownership, intellectual property ownership, control (by whom and over what issues or areas), dispute resolution, and exit and break-up structures, can cause a partnership that looks ideal at the outset to become a nightmare for the parties when problems arise.

In this session, Bruce W. Jenett, a shareholder in the law firm of Heller Ehrman LLP (Menlo Park, CA), and formerly cohead of the firm's life sciences practice, will lead a panel of experts in a discussion of the key issues that arise in the process of creating such corporate partnerships, and how best to deal with them from a practical standpoint. Among other areas of interest, the panel will examine and discuss how recent cross-sector partnerships and licensing arrangements set the stage for future deals, and what private investors and cross-sector company partners need to keep in mind when providing support for a technology convergence venture.

In the following interview with MX editor-in-chief Steve Halasey, Jenett discusses some of the key issues affecting corporate partnering in cross-sector ventures, and foreshadows areas to be considered by this panel of experts.

MX: When companies from different life sciences sectors come together, what sorts of pitfalls do they need to be watching for?

Bruce W. Jenett: When companies from different sectors of the life sciences industry—for example a device company and a drug company—come together to partner for a combined technologies product, the result can sometimes be like throwing a dog and a cat into a small room and telling them to play together. That typically doesn't work because those animals are, at least in popular thought, different in their fundamental nature and approach to life.

The same is true in a cross-sector deal. Frequently the two parties really don't understand how very different the mindset and expectations of the other party can be. And that frequently leads to structures that look nice on paper but simply don't work in the real world of development and risk.

Companies that decide to collaborate on a combination product need to understand that the regulatory and reimbursement pathways for some combination products may not be very clear. They also need to understand and carefully plan for product liability issues and IP matters, including indemnification procedures and risk allocation, all of which may be very different for a combination product than for either product alone.

All too often, what companies find out in the real world, when products have been out in the market for a while, is that statistically the real world is far more complex than any laboratory study or clinical trial will ever determine. There is a likelihood that something that works wonderfully in a Phase II trial may wind up being a disaster in the marketplace. Vioxx, thalidomide, and silicone breast implants are but a few examples of this thesis. Partners would do well to expect such problems and to plan how they will handle them and how they will allocate risk and loss between themselves as a matter of contract.

And the intellectual property (IP) landscape in a given area, such as a cancer drug, is complex enough even before one layers on the IP landscape in, for example, the implantable pump area.

Life sciences investors typically want to know about a product's regulatory pathway early on, don't they?

Investors certainly want to know whether a company is going to be able to make and sell a product that won't hurt or kill people, that will do something better than what's already out there, and that will not get blocked by the regulatory authorities for marketing approval at the very last step of the regulatory process.

Again, understanding and planning carefully for a clear regulatory and reimbursement pathway is as important as determining who will own what IP rights or who will fund what parts of the project.

The companies and their investors of course also have to know how crowded the IP space is, what companies have the strongest portfolios, and whether aggressive players are likely to file infringement suits, sometimes just to put a competitor out of business. No venture capitalist goes into an emerging-company investment planning to spend a huge chunk of the money on the lawyers, much less on IP litigation.

Being sure that you get the regulatory, reimbursement, and IP landscape very clear at the outset, especially in a cross-sector partnering deal with more than one technology at play, is absolutely crucial. Sometimes the parties are so anxious to get going that they don't take the time to really gather the right information and thoughtfully assess it before getting into the deal documents.

All the clever mechanisms and structures for operation of the partnering arrangement won't matter very much if the regulatory pathway is blocked and it could have been foreseen and planned around, or if an IP suit gets filed out of the blue that also could have been reasonably foreseen and planned around.

What kinds of due diligence are required when life sciences companies from different sectors are proposing to partner with one another in some way?

Of course, the bedrock is scientific due diligence, which consists of determining whether the proposed product or technology seems likely to work for its intended use.

Market due diligence is obviously key—who's going to buy it, what will they be willing to pay for it, and who will help them pay for it.

For effective IP due diligence—and the initial and follow-on IP strategy that should grow out of that due diligence—you really need a specialist in the particular sector area. The problem is that many times patent lawyers are either wet-side (biotech) or dry-side (device) focused and experienced, and they may have a hard time bridging the gap to really understand the IP space for a combined product, especially where the major IP players and the IP strategies and tactics may be different in each sector.

The contracts that formalize company partnerships must include a lot of moving parts.

True, but the good news is that all of those parts are pretty well understood by most lawyers who are experienced in the life sciences industry. Many of the issues in a life sciences deal—and particularly in a cross-sector deal (again, such as a drug-device combination product) within the overall life sciences industry—are not the same as those faced in partnering deals in the software or semiconductor industries. So, again, it is key to have not just any lawyer, but a lawyer with expertise in the industry, and with access to other expert colleagues, for example in the areas of IP, regulatory, and reimbursement.

The other good news is that biotech and pharmaceutical companies have been undertaking joint ventures and other collaborative development arrangements involving complex discovery and development activities for many years, and there is a lot of good information and good examples out there. So there's no need to reinvent the wheel when structuring and documenting a partnering deal.

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